Mutual funds hit by SEBI ban on new funds, NFO collection drops 42%

Hit by markets regulator SEBI's ban on the launch of new fund offerings, mutual funds' collection through fresh schemes remained subdued at Rs 62,342 crore in 2022-23, which was 42% lower than in the preceding fiscal.

However, a higher number of NFOs were launched in 2022-23 (FY23) compared to the preceding year.

A total of 253 new schemes were floated in FY23, which was way higher than 176 new fund offers (NFOs) launched in 2021-22, according to the data compiled by Morningstar India.

Moreover, in the current fiscal so far, AMCs have floated 12 NFOs in different categories, the industry data stated.

In the past fiscal year, fund managers focused on passive funds and fixed-income categories like fixed maturity plans.

As per the data, a total of 182 open-end funds and 71 closed-end funds were launched in the financial year 2022-23, and cumulatively, these funds garnered Rs 62,342 crore.

In comparison, 176 NFOs were floated in 2021-22 and cumulatively, these funds were able to mobilise Rs 1,07,896 crore while 84 new schemes were launched in 2020-21 raising Rs 42,038 crore.

Usually, NFOs come during a surging market when investor sentiment is high and optimistic. The stock market performance along with positive investor sentiments led to higher fund mobilisation through NFOs in 2021-22.

However, the NFO collections in FY23 were impacted by several factors such as three months ban imposed by Sebi on launching new schemes, highly volatile markets, FPI outflows and global factors, experts believe.

Generally, an AMC launches a new mutual fund scheme—NFO—to bridge the gap in its product portfolio. Post the categorisation and rationalisation of mutual fund schemes by SEBI in 2017, many AMCs merged existing mutual fund (MF) schemes and launched NFOs.

Kaustubh Belapurkar, Director - Manager Research at Morningstar Investment Adviser India, advised investors to invest in NFOs only if they offer something unique and bridge a gap in their existing portfolios. Most investors are best served by continuing to invest in similar existing funds with well-established track records.

Gopal Kavalireddi, Head of Research at FYERS, said that all NFOs are not the same and have their pros and cons for investment.

Launching an innovative theme or strategy currently unavailable in the market can be purposeful and suitable to investors. But, an NFO has no performance record to research and understand the underlying stocks. With just an investment objective and some generic information, it is difficult for an investor to assess its suitability. In addition, marketing and the launch of an NFO involve higher initial expenses, managed from the pooled money, he said.

"Unlike an IPO of a particular stock where only specific quantities of shares are on offer and price changes due to an imbalance between demand and supply, a mutual fund's Net Asset Value (NAV) per unit doesn't change. Hence, investors need not necessarily rush to apply during an NFO phase and can wait for the portfolio construction before making an investment decision," he added.

In 2022-23, AMCs were focused on floating NFOs in other schemes categories, especially index funds, and debt-oriented schemes segment, mainly fixed-term plans.

The maximum number of funds (84) was launched in the index fund segment, which amassed Rs 6,004 crore, followed by fixed-term plans (71), which mobilised Rs 16,356 crore, and other ETFs (36), which collected Rs 3,216 crore.

Further, in the equity category, 32 NFOs were launched, while six new fund offerings were floated in the hybrid category.